UNIGE document Working paper
previous document  unige:138414  next document
add to browser collection
Title

Decomposition of optimal dynamic portfolio choice with wealth-dependent utilities in incomplete markets

Authors
Li, Chenxu
Shen, Yiwen
Year 2020
Description 65 p.
Abstract This paper establishes a new decomposition of optimal dynamic portfolio choice under general incomplete-market diffusion models by disentangling the fundamental impacts on optimal policy from market incompleteness and flexible wealth-dependent utilities. We derive explicit dynamics of the components for the optimal policy, and obtain an equation system for solving the shadow price of market incompleteness, which is found to be dependent on both market state and wealth level. We identify a new important hedge component for non-myopic investors to hedge the uncertainty in shadow price due to variation in wealth level. As an application, we establish and compare the decompositions of optimal policy under general models with the prevalent HARA and CRRA utilities. Under nonrandom but possibly time-varying interest rate, we solve in closed-form the HARA policy as a combination of a bond holding scheme and a corresponding CRRA strategy. Finally, we develop a simulation method to implement the decomposition of optimal policy under the general incomplete market setting, whereas existing approaches remain elusive.
Keywords Optimal portfolio choiceDecompositionIncomplete marketWealth-dependent utilityClosed-form.
Full text
Working paper (Accepted version) (798 Kb) - public document Free access
Structures
Research group Geneva Finance Research Institute (GFRI)
Citation
(ISO format)
LI, Chenxu, SCAILLET, Olivier, SHEN, Yiwen. Decomposition of optimal dynamic portfolio choice with wealth-dependent utilities in incomplete markets. 2020 https://archive-ouverte.unige.ch/unige:138414

27 hits

5 downloads

Update

Deposited on : 2020-07-14

Export document
Format :
Citation style :